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Although the Chen Company’s milling machine is old, it is still in relatively good working order and would last for another 10 years. It is inefficient compared to modern standards, though, and so the company is considering replacing it. The new milling machine, at a cost of $110,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $19,000 per year. It would have zero salvage value at the end of its life. The firm’s WACC is 10%, and its marginal tax rate is 35%. Should Chen buy the new machine?
Money, Inc., has no debt outstanding and a total market value of $150,000. Earnings before interest and taxes, EBIT, are projected to be $36,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 15 perc..
Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC) for use in capital budgeting?
Consider a project that has 6 years of life time. This project requires investment of $1,000,000 at time zero for machinery and equipment to be depreciated over 5 year with half year straight line depreciation method (starting in year 1 to year 6). A..
Consider 2 bonds, A and B. The coupon rates are 10% and the face values are $1,000 for both bonds. Both bonds have annual coupons. Bond A has 20 years to maturity while Bond B has 10 years to maturity. What are the prices of the 2 bnds if the relevan..
Pierce Products Inc. is considering changing its capital structure. F. Pierce currently has no debt and no preferred stock, but would like to add some debt to take advantage of low interest rates and the tax shield. what is the firm's optimal capital..
A new product is being designed by an engineering team at Golem Security. Several managers and employees from the cost accounting department and the marketing department are also on the team to evaluate the product and determine the cost using a targ..
Regression analysis estimates
The Wintergreens are planning ahead for their son's education. He's eight now and will start college in 10 years. How much will they have to set aside each year to have $65,000 when he starts if the interest rate is 7%?
During the year, the Senbet Discount Tire Company had gross sales of $1.2 million. The firm’s cost of goods sold and selling expenses were $539,000 and $229,000, respectively. The firm also had notes payable of $940,000. These notes carried an intere..
Briefly state what the Capital Asset Pricing Model (CAPM) claims about:
The Fisher effect is defined as the relationship between which of the following variables?
Consider a firm that had been priced using an 8.5 percent growth rate and a 10.5 percent required return. The firm recently paid a $2.00 dividend. The firm has just announced that because of a new joint venture, it will likely grow at a 9.0 percent r..
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